Apple: Why Nomura set an underwater price target

An iPhone launch, writes analyst Jeffrey Kvaal, is not the catalyst of yore.

With Apple trading above $228, he’s set a price target of $210.

From note to clients sent last Friday that I just discovered in my inbox:

Flat unit volumes, a leaky supply chain, and a story that has broadened to services and buybacks has lessened, though not eliminated, the import once granted the release of the new iPhones. We expect the impending cycle to bring stable unit volumes, modest ASP expansion, and generally sufficient verve to allow services and buybacks to drive EPS growth.

ASP [average selling price] tailwinds not quite over, but may be understood [i.e. priced in]. Our production work suggests the $800 model will take ~50% of the volume and the $1000 model will take ~30%. This implies FY19 ASPs can rise to ~$20 to $780. This is ahead of consensus at $757. Conversely, it is less than the $100 increase in FY18 and seems anecdotally to be understood by investors.

Services growth to remain robust for now. Our SensorTower check shows App Store sales are up 28% YoY—implying Services growth should remain at or above 25%. We consider an App Store end-run by Netflix (or others) one of several risks over time—Spotify has had success…

Price target to $210 in recognition of higher tech multiples. We reset our target multiple from ~13.0 to ~14.5x. This is just below the S&P500’s 16.0x multiple (Apple has traded at parity only briefly since 2011) and implies 2.5x the devices sales and 7.3x services—neither of which appear conservative.

Kvaal Call. Higher multiples and buybacks do not seem a foundation for sustained appreciation.